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We tend to know our companies really well and know whether we trust management or not. We know the companies better than Wall Street does.
Thyra Zerhusen

Jones, which announced its purchase by News Corp. NWSA just two months after Zerhusen bought the stock, to longtime favorites, such as Andrew Corp., which was bought by Commscope CTV. Such moves can have a significant effect on the fund’s returns, given that Zerhusen runs a concentrated portfolio of 30 to 35 stocks. Her long-term perspective results in low turnover, typically 20% to 30% annually; some favorite stocks, such as Unisys UIS and BorgWarner BWA, have been in the portfolio for years. When Zerhusen does sell a stock, it’s often because it has become too expensive, has grown into a large cap, or both. She’s fairly strict about selling stocks that exceed her upper market-cap limit of roughly $12 billion, even if it means leaving money on the table. One example is her 2005 sale of Monsanto, which had grown too big; it eventually doubled in price again after she sold it. She also sold Apple AAPL for similar reasons; it is now the world’s largest technology company by market cap.
Striking a Balance

or not. We know the companies better than Wall Street does.” Such a balance between elements of value and growth investing can be tough to pull off, but Zerhusen has done an admirable job. That’s a big reason why the fund has been able to excel in both bull markets and bear markets. Some of her holdings look like traditional value stocks, such as the fund’s media names, but she has put a significant chunk of the portfolio into technology, mainly niche players, for a long time. A recent favorite was Molex MOLX, a maker of electronic connectors that helps companies be more efficient (a favorite theme) and is growing fast overseas (another favorite). Zerhusen made Molex a top holding in the fund, and then trimmed the position after the stock gained more than 50% in 2009. The fund’s biggest holding is another technology stock, Akamai Technologies AKAM, which helps companies deliver online content. Akamai became the fund’s largest holding at the end of 2008 after Zerhusen kept buying shares amid the market turmoil. It paid off big: The stock gained more than 150% over the next 18 months. “I’m pretty proud of our record,” she says. She’s also one of the fund’s biggest shareholders, with more than $1 million of her own money invested in it, so the decisions she makes on behalf of other shareholders have a big effect on her own bottom line. Mid-cap investing can be a treacherous business, but Zerhusen has shown how to do it well, with steadiness and aplomb. K
David Kathman, CFA, is mutual fund analyst with Morningstar.

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Zerhusen has no regrets, though. She knows that she’s running a mid-cap fund, and the discipline that keeps the portfolio in mid-cap territory is as important as her valuation discipline. She is far from a deep-value investor, however, often preferring companies with good growth potential that are not being recognized by the market. In that way, she’s similar to Buffett, whose investment philosophy combines the valuation discipline of Benjamin Graham with the ideas of pioneer growth investor Philip Fisher. Like Buffett, she says, “We tend to know our companies really well and know whether we trust management

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Morningstar Advisor - August/September 2010

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